Seplat Petroleum: Nigeria’s Top Indigenous E&P is coming of age

Revenue growth buoyed by production ramp-up:SEPLAT’s 2018FY revenue expanded by 65.16% to NGN228.39bn. This strong performance was underpinned by an 80.09% increase in crude oil receipts, which accounted for 79.14% (NGN180.75bn) of overall revenue. An attractive oil price environment alongside an evident production ramp up, (particularly in OMLs 4, 38 & 41) combined to great effect to set the company on the path of full recovery following 2017 woes when the company could not operate from the Forcados Terminal for more than six months.

While average oil price realization was USD70.10pb (vs. USD50.38pb in 2017FY), Working Interest (W.I) production was at 49,867boepd (made up of 25,669bpd of oil and 145MMscfd of gas), a marked improvement on the 36,923boepd (17,853bpd of oil and 114MMscfd of gas) recorded in 2017 due to production downtimes on the Trans-Forcados Pipeline – the main evacuation route for SEPLAT’s crude. With completion of the Warri evacuation route (30,000bopd capacity) and near-term completion of the 160,000bopd Amukpe-Escravos pipeline, the company has successfully increased evacuation redundancies and de-risked its crude exports. The gas business remained a vital source of revenue growth, contributing 20.86% to revenue in 2018FY.

Cost discipline sustains operational efficiency, as deferred tax drags bottomline: Cost of Sales was at NGN108.64bn (vs. NGN73.41bn in 2017FY), nevertheless, Cost-to-Sales ratio settled lower at 47.57% (vs. 53.09% in 2017FY). Consequently, Gross profit improved by 84.60% to NGN119.75bn (vs. NGN64.87bn in 2017FY), with gross margin at 52.43%. Meanwhile, operating expenses declined by 0.64% while operating income grew by 175.97% to settle at NGN94.88bn. As a direct result of improved operational performance, increased finance income and relatively slower pace of growth in finance cost, SEPLAT grew PBT significantly from NGN13.45bn in 2017FY to NGN80.62bn (499.41% increase) in 2018FY. However, PAT (NGN44.87bn) declined by 44.68%, due to recognition of deferred taxes. In 2017FY, there were tax credits to the tune of NGN67.66bn, which were not available in 2018.

Balance Sheet deleveraged, enhanced value accretion to Shareholders: Post period-end 2018, the company paid down USD100mn (NGN30.7bn) on its Revolving Credit Facility (RCF), easing debt levels to only the USD350mn bond issued during the year. Cash position as at year end was NGN179.51bn (USD585mn), from which the company plans to finance about USD200mn in capital expenditure this year (2017: USD88mn) to drive the next phase of the ANOH Gas project and drill 7 new oil production wells. After paying a special dividend of USD0.05 in April 2018 to compensate for the no-show in 2017, the company declared interim and final dividends of USD0.05 in October 2018 and March 2019 respectively, bringing total dividends for 2018 to USD0.10/share. This implies a payout ratio of 39.02% and a dividend yield of 5.35% for the year.

Outlook and Recommendation: Given the company’s guidance for 2019FY which includes a WI target range of 49,000 – 55,000boepd, a Liquid Treatment Facility to enhance export grade dry crude that should save c.USD30 –USD40mn in charges, we believe it is well positioned to achieve its long-term objective of becoming the largest indigenous E&P Company. However, in 2019FY, we expect average oil price realization to settle lower at c.USD65pb, with marginal production growth and more barrels (4.0MMbbls) hedged at a lower price of USD50pb, causing revenue to deteriorate by 7.46% to NGN211.35bn. Lower taxes should however buffer earnings to the level of NGN54.50bn while current expansion efforts should spur topline and earnings growth over the medium term. Our target price for SEPLAT was reviewed downwards and the Target PE was also revised to 6.50x. We applied this to an expected EPS of NGN95.87 to arrive at a target price of NGN623.16, an upside potential of 9.33% to the current share price of NGN570.00.

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